financial literacy

In a new working paper published in the World Bank Working Paper Series, John Gibson, David McKenzie, and I look at exactly this question.

While much of migration policy has been focused on reducing costs of remittances and introducing new and inexpensive transmission channels, relatively little attention has been paid to educating customers on such benefits. After all, this could be pretty low hanging fruit – tell migrants about a cheaper way of remitting and they will switch.

With this thought in mind, we designed an information dissemination experiment for migrant workers in both Australia and New Zealand who had migrated from the Pacific Islands, East Asia, and Sri Lanka.

My colleague Bilal Zia and I organized a conference on New Ideas in Business Growth: Financial Literacy, Firm Dynamics and Entrepreneurial Environment that took place at the World Bank last Wednesday. The conference brought together researchers and policy makers in the area of private sector development to share new findings about the types of policy interventions that are effective at promoting business growth. We decided to focus the discussion on three topics that have recently received increased attention from both a research and a policy angle: 1) business and financial literacy training 2) the business environment and 3) corporate governance and firm dynamics. The selection of these three topics also raised a larger question in my mind—should the research community spend so much of its effort on microenterprises, when larger firms may have much higher growth potential? That’s a question I’ll return to at the end of the post.

In recent years, many governments, international institutions, and NGOs around the world have been providing business and financial literacy training for entrepreneurs. However, so far, we know relatively little about the impact of this training on business performance and growth. In an effort to contribute to filling this knowledge gap, Bilal and I conducted a randomized control trial in Bosnia-Herzegovina, where we collaborated with a microfinance institution and an NGO to provide business and financial literacy training to young entrepreneurs.

Conditional cash transfers? This might be a popular answer, with evidence from a number of countries that they have increased household expenditure , schooling, and health outcomes. But even though Governments devote significant resources to such programs, the absolute annual increases in household income and expenditure are still at most US$20-40 per capita for participating households.

I bet that facilitating international migration is not very high up the list of interventions people think of. But it should be.In a new working paper, John Gibson and I evaluate the development impacts of New Zealand’s new seasonal worker program, the RSE.The figure below compares the per-capita income gain we estimate to those from microfinance, CCTs, and from my previous research giving grants of $100-200 to microenterprises. It is simply no contest!

How much does management matter for economic performance? Despite a large industry of business schools, consulting firms, and airport books purporting to teach you the secrets of good management over the course of your next flight, the answer until very recently has been “we don’t know”. In a recent review, Chad Syverson goes as far as to say “no potential driving factor of productivity has seen a higher ratio of speculation to empirical study”.

Together with colleagues from Stanford and Berkeley, I have been working for the last couple of years to try and understand how much management matters by means of a randomized experiment among textile factories in India. In common with most firms in developing countries, the firms (with 300 workers on average) we were working with did not collect and analyze data systematically in their factories, had few systems for regular maintenance and quality control, had weak human resource systems for promoting and rewarding good performers, and had little control over inventory levels. The result was a high level of quality defects, large stockpiles of unorganized inventories, and frequent breakdowns of machines. 20 percent of the labor force was occupied solely in checking and repairing defective fabric (see picture).

But what do we know about financial literacy? Does it work, and if so, through what mechanisms? Despite the money being ploughed into financial literacy programs, we know very little to address these important questions. While it is true that there is a large and growing body of survey evidence from both developed and developing countries that demonstrate a strong association between financial literacy and household well-being, we are still in the process of learning whether this relationship is causal.